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Capitalizing on the Transformative M&A Market

This article was originally published on ETFTrends.com.

Merger and acquisition activity continues to be robust and is expected to remain elevated as the year progresses. However, not all M&A investment strategies are alike.

On the upcoming webcast Tuesday, Aug. 7, Capitalizing on the Transformative M&A Market, Dan Petersen, Director of Product Management at IndexIQ, Kelly Ye, Director of Research at IndexIQ, and Mark Lacuesta, Director of Index Strategies at IndexIQ, will discuss how investors can potentially reduce portfolio risk while taking advantage of the transformative M&A market.

Specifically, the Index IQ Merger Arbitrage ETF (MNA) provides investors with a diversified approach to a group of takeover targets. The ETF employ a type of alternative, “directional hedge fund strategy” called merger arbitrage. The fund would capture the spread or difference between a stock’s trading price before a deal is announced and its eventual takeover price.

"The increase in M&A activity has opened the door to numerous investment opportunities. Having a well-defined strategy, coupled with the use of hedging strategies, may help investors capitalize on the potential upside, while seeking to reduce some of the risks typically associated with merger arbitrage," Petersen said in a recent note.

Merger arbitrage is a hedged, alternative investment strategy designed to take advantage of price discrepancies that exit for companies involved in a merger. The strategy would purchase companies at prices below the target price and lock in the difference, or spread. By targeting this spread, the generated returns are generally outside of normal fluctuations of the broader market.

A M&A Investment Strategy

A merger arbitrage investment strategy may help investors garner more consistent returns and possibly deliver a smoother ride, serving as an important capital preservation tool and providing drawdown protection in times of volatile market conditions.

"Merger arbitrage offers several potential benefits for investors, including increased diversification and the potential ability to dampen the impact of rising market volatility. In addition, given its negative correlation to the overall fixed income market, a merger arbitrage strategy may also be an appropriate investment vehicle in a rising interest rate environment," Petersen said.

Along with its drawdown protection potential, a merger arbitrage strategy can also improve the risk-to-return profile of a traditional investment portfolio since the drivers of return for this type of strategy are isolated from broad market moves.

Consequently, since the strategy is not expected to be highly correlated to other asset classes over time, investors may find a stable platform in stormy weathers if U.S. markets suddenly correct, which is more likely to happen in an extended bull market condition.

Financial advisors who are interested in learning more about the merger and acquisition arbitrage strategy can register for the Tuesday, August 7 webcast here.